Why are you holding bonds

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Orbuculum Nongata
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Re: Why are you holding bonds

Post by Orbuculum Nongata »

rockstar wrote: Thu Feb 06, 2020 2:40 pm
nisiprius wrote: Thu Feb 06, 2020 2:12 pm One important detail: are you truly risk tolerant, or have you merely convinced yourself that there isn't actually that much risk?
How are you defining risk?

I will not stay the course and incur a 30% draw down. I do have a floor and ceiling to buy and sell for peace of mind.
I respect your choice to invest in the manner that best suits you. Since I’m of the belief that a loss doesn’t become material until there is a sale, I set my asset allocation according to my risk tolerance and stick with it (stay the course) instead of arbitrarily locking in a loss or limiting a gain. Admittedly, that’s just me and I could be as incorrect as anyone.
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Re: Why are you holding bonds

Post by azanon »

Presintense wrote: Fri Feb 07, 2020 2:20 pm
azanon wrote: Thu Feb 06, 2020 9:47 am Let me at least do a mic check here - everyone knows the bull market is 11 years long now right, and that's fairly unusual?d
Is it 11 years long or 11 years short? In all seriousness, are there metrics that are commonly accepted as “usual” about the length of a bull market?
If a quick google search can be trusted, the average length of a bull market is 4.5 years. So 11 yrs is close to 2.5x average length.
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Re: Why are you holding bonds

Post by Orbuculum Nongata »

That’s interesting. If I personally had any idea whether that fact is trivial or meaningful I would have a better gauge on whether or not it justifies action. I definitely don’t think this bull market will last forever. Similarly, I am highly doubtful that the next bear market will last forever. So my bet with myself is that the asset allocation I’ve chosen will see me through both this bull and the next bear and back. Thanks for the info on the duration of past bull markets. More than anything I am fascinated by the human conditions demonstrated on bogleheads where there are simultaneous discussions regarding the possible end of a bull market and those questioning the value of bonds in their portfolios.
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Re: Why are you holding bonds

Post by michaeljc70 »

azanon wrote: Sat Feb 08, 2020 1:11 pm
Presintense wrote: Fri Feb 07, 2020 2:20 pm
azanon wrote: Thu Feb 06, 2020 9:47 am Let me at least do a mic check here - everyone knows the bull market is 11 years long now right, and that's fairly unusual?d
Is it 11 years long or 11 years short? In all seriousness, are there metrics that are commonly accepted as “usual” about the length of a bull market?
If a quick google search can be trusted, the average length of a bull market is 4.5 years. So 11 yrs is close to 2.5x average length.
And the average bear market is 14 months.

Yes, the current bull market is longer than average bull market. I guess you could have sold 6 years ago when it was getting longer than average. Where would that have left you?
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Re: Why are you holding bonds

Post by tibbitts »

stocknoob4111 post_[b wrote:[/b]id=5001154 time=1580922837 user_id=129058]
This question is more for those in the accumulation phase with a 10+ year time window, I get the capital preservation aspect of those who are retired and withdrawing from their portfolios.

Was reading the 2020 outlook by A Wealth of Common Sense blog: https://awealthofcommonsense.com/2020/0 ... e-markets/

The point is made that over the next decade Bond returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting yields. For the 2010s the starting yields was 2.3% and the decade returns was about a percentage higher at 3.2%, for the
2020s (which isn't in the table) the starting yield would be 1.6% and we can estimate the decade returns would be 1.8% or so annualized which is negative in real terms.

These are for 5 year Treasuries so perhaps a tad bit higher for Intermediate term (7 years) but either way the returns are shockingly lousy. Net taxes it's even lousier (and YES, most who have a taxable account HAVE to pay some taxes regardless of asset location...)

Question - is the conventional advise of diversification into bonds (which is no longer serving the purpose of capital preservation) valid? What steps, if ANY, are you taking to move away from bonds? If not bonds then what are you replacing them with? Equities? REITs?

For accumulators with at least a decade time horizon, bonds may not be the best choice to have considerable capital tied up.
I assume you understand that the following also applies:

The point is made that over the next decade equity returns will be extremely low (perhaps even negative in real terms) due to returns being heavily dependent on starting valuations.

... and

For accumulators with at least a decade time horizon, equities may not be the best choice to have considerable capital tied up.

Substitute REITs, cash, or actually almost any other asset class, if you prefer. There is considerable sentiment that you're going to lose over the next decade or two or three no matter what you do. That may or may not turn out to be the case, but to most people, nothing looks like a bargain at the moment.
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Re: Why are you holding bonds

Post by illumination »

azanon wrote: Sat Feb 08, 2020 1:11 pm
Presintense wrote: Fri Feb 07, 2020 2:20 pm
azanon wrote: Thu Feb 06, 2020 9:47 am Let me at least do a mic check here - everyone knows the bull market is 11 years long now right, and that's fairly unusual?d
Is it 11 years long or 11 years short? In all seriousness, are there metrics that are commonly accepted as “usual” about the length of a bull market?
If a quick google search can be trusted, the average length of a bull market is 4.5 years. So 11 yrs is close to 2.5x average length.


But we had a "bear market" in 2018 and 2011 (dropping 20% or more), so where is this "11 year bull market" figure coming from?

https://www.cnbc.com/2018/12/24/whats-a ... last-.html
https://money.cnn.com/2011/10/04/market ... /index.htm
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Re: Why are you holding bonds

Post by azanon »

michaeljc70 wrote: Sat Feb 08, 2020 2:52 pm
azanon wrote: Sat Feb 08, 2020 1:11 pm
Presintense wrote: Fri Feb 07, 2020 2:20 pm
azanon wrote: Thu Feb 06, 2020 9:47 am Let me at least do a mic check here - everyone knows the bull market is 11 years long now right, and that's fairly unusual?d
Is it 11 years long or 11 years short? In all seriousness, are there metrics that are commonly accepted as “usual” about the length of a bull market?
If a quick google search can be trusted, the average length of a bull market is 4.5 years. So 11 yrs is close to 2.5x average length.
And the average bear market is 14 months.

Yes, the current bull market is longer than average bull market. I guess you could have sold 6 years ago when it was getting longer than average. Where would that have left you?
I'd never completely sell out - 100% Bonds/cash is the only "wrong" portfolio. If i had went to a minimum variance portfolio, I'd be just fine.

I probably should clarify something that might be different for you and I. My savings strategy isn't dependent on the market being successful. I retire in 10 years no matter what happens. I save enough to where the range of difference is retiring with enough, or retiring with more than enough.
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Re: Why are you holding bonds

Post by Caduceus »

I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
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Re: Why are you holding bonds

Post by rockstar »

Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Check out page 3. He's a bigger buyer on the short end.

https://berkshirehathaway.com/qtrly/3rdqtr19.pdf
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Re: Why are you holding bonds

Post by Caduceus »

rockstar wrote: Sun Feb 09, 2020 7:06 pm
Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Check out page 3. He's a bigger buyer on the short end.

https://berkshirehathaway.com/qtrly/3rdqtr19.pdf
Yes, Berkshire holds lots of cash-equivalents. Not much higher up on the yield curve. I didn't get the impression people were talking about 3 month treasury bills. But if that's what people are talking about - 3 month bills - go for it.
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Re: Why are you holding bonds

Post by mindboggling »

I am retired, but some months I still have new money to invest. I've been splitting it 50/50 between fixed income and the VT ETF. Hope one of them works out--or maybe both?
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Re: Why are you holding bonds

Post by rockstar »

Caduceus wrote: Sun Feb 09, 2020 7:10 pm Yes, Berkshire holds lots of cash-equivalents. Not much higher up on the yield curve. I didn't get the impression people were talking about 3 month treasury bills. But if that's what people are talking about - 3 month bills - go for it.
I stick with the short end of the curve and hold to maturity.

The curve dips at 12 months:

https://www.bloomberg.com/markets/rates ... t-bonds/us

If the idea is that I'm going to roll over bonds into equities when valuations get back to normal, I have to constrain the maturity. I don't feel like I get a lot of reward at 12+ months. I recently rolled over to 1 year CDs for a better yield. To get more yield, I'd have to go with EM debt or high yield. But neither provides me any protection in a downturn.

I'm all for Buffett's 90/10 portfoio, but that's too risky for me with equities trading at 25x earnings. If they drop down to 12x, I'll go 90/10 regardless of my age.
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Re: Why are you holding bonds

Post by Boglehobby »

From my perspective, Bonds serve a low risk parking space for my cash that would provide best calculated yield. I hold about 20% state tax exempt bond fund which appreciates, pays monthly dividends, and cap gains without federal and state taxes. Overall I find this to be a better option than riskier options or CD’s which are subjected to taxes. Also it allows for quick liquidity to get my hands on cash to invest when recession comes.
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Re: Why are you holding bonds

Post by abuss368 »

We have set our asset allocation between stocks and bonds and will stay the course. The allocation to Total Bond will increase over time.
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Re: Why are you holding bonds

Post by bampf »

azanon wrote: Thu Feb 06, 2020 10:11 am
<snip a lot of words>- outcome doesn't determine which strategy was right or wrong. Let's use an analogy to illustrate the concept - if I bought bitcoin today, and it doubled in a week, would that make me "right", or would that make me lucky?
I hate to be pedantic, but how else does one determine if a strategy is right or wrong if not by outcomes? To be clear, generally I wouldn't use a one time event as a predictor of whether a strategy was successful or not (but I could).

Your example I is, in my opinion, incomplete. If I purchased bit coins as a strategic hedge to my portfolio with the expectation that digital currency will have an out sized role in growth over the next ten years, then yes, I would say that a doubling would be a validation of your strategy. If on the other hand you purchased bitcoin because it sounds cool and you know lots of people that have made money off of speculation, well, then no, I don't think it validates your strategy unless you think gambling and hitting it lucky is a core part of your strategy.

Put another way, venture capitalist employ this strategy all the time. They bet on promising technologies and expect a certain amount of them to fail, but, a few to pay off huge. That is their strategy and outcomes surely dictate whether they are right or wrong.
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Re: Why are you holding bonds

Post by averagedude »

I hold bonds in case stocks go down the toilet. I hold domestic stocks in case bonds go down the toilet. I hold International stocks in case domestic stocks go down the toilet. I am really hoping that all three don't go down the toilet at the same time.
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Re: Why are you holding bonds

Post by gmaynardkrebs »

rockstar wrote: Sun Feb 09, 2020 7:21 pm
Caduceus wrote: Sun Feb 09, 2020 7:10 pm Yes, Berkshire holds lots of cash-equivalents. Not much higher up on the yield curve. I didn't get the impression people were talking about 3 month treasury bills. But if that's what people are talking about - 3 month bills - go for it.
I stick with the short end of the curve and hold to maturity.

The curve dips at 12 months:

https://www.bloomberg.com/markets/rates ... t-bonds/us

If the idea is that I'm going to roll over bonds into equities when valuations get back to normal, I have to constrain the maturity. I don't feel like I get a lot of reward at 12+ months. I recently rolled over to 1 year CDs for a better yield. To get more yield, I'd have to go with EM debt or high yield. But neither provides me any protection in a downturn.

I'm all for Buffett's 90/10 portfoio, but that's too risky for me with equities trading at 25x earnings. If they drop down to 12x, I'll go 90/10 regardless of my age.
Why not g0 50/50 now?
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Re: Why are you holding bonds

Post by gmaynardkrebs »

bampf wrote: Sun Feb 09, 2020 8:43 pm
azanon wrote: Thu Feb 06, 2020 10:11 am
<snip a lot of words>- outcome doesn't determine which strategy was right or wrong. Let's use an analogy to illustrate the concept - if I bought bitcoin today, and it doubled in a week, would that make me "right", or would that make me lucky?
I hate to be pedantic, but how else does one determine if a strategy is right or wrong if not by outcomes? To be clear, generally I wouldn't use a one time event as a predictor of whether a strategy was successful or not (but I could).

Your example I is, in my opinion, incomplete. If I purchased bit coins as a strategic hedge to my portfolio with the expectation that digital currency will have an out sized role in growth over the next ten years, then yes, I would say that a doubling would be a validation of your strategy. If on the other hand you purchased bitcoin because it sounds cool and you know lots of people that have made money off of speculation, well, then no, I don't think it validates your strategy unless you think gambling and hitting it lucky is a core part of your strategy.

Put another way, venture capitalist employ this strategy all the time. They bet on promising technologies and expect a certain amount of them to fail, but, a few to pay off huge. That is their strategy and outcomes surely dictate whether they are right or wrong.
A wrong result is not the same as a bad decision.
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Re: Why are you holding bonds

Post by gmaynardkrebs »

averagedude wrote: Sun Feb 09, 2020 9:09 pm I hold bonds in case stocks go down the toilet. I hold domestic stocks in case bonds go down the toilet. I hold International stocks in case domestic stocks go down the toilet. I am really hoping that all three don't go down the toilet at the same time.
That's why people hold cash.
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Re: Why are you holding bonds

Post by Pierre Delecto »

I’m not!
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Re: Why are you holding bonds

Post by pascalwager »

azanon wrote: Thu Feb 06, 2020 10:42 am
michaeljc70 wrote: Thu Feb 06, 2020 10:35 am
azanon wrote: Thu Feb 06, 2020 10:28 am
michaeljc70 wrote: Thu Feb 06, 2020 10:21 am
azanon wrote: Thu Feb 06, 2020 10:11 am

Who says it isn't actionable? Me. Do you buy and sell based on CAPE and expected returns? That is market timing,

You either missed or disagreed with my previous point - outcome doesn't determine which strategy was right or wrong. Let's use an analogy to illustrate the concept - if I bought bitcoin today, and it doubled in a week, would that make me "right", or would that make me lucky? As the other link I added says, there is no predictive ability of CAPE. So, I don't get your point. It is something for people (especially in the media) to talk about and sensationalize just like an inverted yield curve. If you laid out a strategy I didn't see it. An expected return is not a strategy.
When I shop at the grocery store, and check price/unit of product I'm getting, and buy the one with the best value, no one accuses me of market timing then. I believe that's because I am, in fact, buying the best value by actual definition.

If I'm understanding you correctly, you're suggesting that in the case of stocks, I should pay whatever they're charging for them even though I have price/sales, price/earnings, book value, PE 10, and any number of actual business stats available to me? Is there anything else besides stocks, where I should just pay whatever someone's asking for it, or just stocks?

I'm curious, if you were buying a local business that you liked, would you just pay whatever they were asking, or would you ask to see the books?

I'll have to say, I had no idea I'm market timing when I look at yields on bond funds before I buy them, or earnings on stocks. I thought that was just being responsible. Who knew!
I don't get your analogy. Looking at the books of a business and buying the stock market is not the same thing. There is a huge market for stocks and it is fairly efficient. If I need something from the grocery store I probably need it now and cannot wait 6 or 12 months like you can to buy an investment.

So, what is your strategy when you look at bond yields and earnings of stocks? Is there a formula or rules or just how you feel about it? What if the CAPE is high and bond yields are low? Do you put it in Bitcoin or a MM? Please tell us your strategy rather than analogies.
I'm doing something more along the lines of what 5 Trillion dollar+ Vanguard suggested; I'm currently ~ 50% equities, and about 60% of those are International. I do actually make adjustments sometimes because I think valuations matter and are relevant, just like Vanguard does and just like Jack Bogle did. So, per mathematics, I'm currently ~ 20% US stocks. As I said earlier, sometimes that 30-1 does come in, and a hedged bet is usually a wise bet.
I see that Vanguard is proposing another way to invest using a time-varying allocation based on their annual economic forecast for those willing to take forecast model risk. The current Slowdown portfolio does have a substantial int'l stock tilt but also requires 31% LTT bonds. It's something to consider, but a retiree would need to understand that the model considers inflation to be unlikely during the forecast period.

But the LTT bonds are an important part of the modest overall portfolio returns as the forecast includes low equity returns. The portfolio isn't efficient without the LTT bonds.
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Re: Why are you holding bonds

Post by bampf »

gmaynardkrebs wrote: Mon Feb 10, 2020 12:19 am
bampf wrote: Sun Feb 09, 2020 8:43 pm
azanon wrote: Thu Feb 06, 2020 10:11 am
<snip a lot of words>- outcome doesn't determine which strategy was right or wrong. Let's use an analogy to illustrate the concept - if I bought bitcoin today, and it doubled in a week, would that make me "right", or would that make me lucky?
I hate to be pedantic, but how else does one determine if a strategy is right or wrong if not by outcomes? To be clear, generally I wouldn't use a one time event as a predictor of whether a strategy was successful or not (but I could).

Your example I is, in my opinion, incomplete. If I purchased bit coins as a strategic hedge to my portfolio with the expectation that digital currency will have an out sized role in growth over the next ten years, then yes, I would say that a doubling would be a validation of your strategy. If on the other hand you purchased bitcoin because it sounds cool and you know lots of people that have made money off of speculation, well, then no, I don't think it validates your strategy unless you think gambling and hitting it lucky is a core part of your strategy.

Put another way, venture capitalist employ this strategy all the time. They bet on promising technologies and expect a certain amount of them to fail, but, a few to pay off huge. That is their strategy and outcomes surely dictate whether they are right or wrong.
A wrong result is not the same as a bad decision.
Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
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Re: Why are you holding bonds

Post by Peculiar_Investor »

I could have typed an answer, but this is better than anything I would have posted.
nisiprius wrote: Wed Feb 05, 2020 4:46 pm I continue to hold a heavy allocation to bonds because I see no compelling reason to expect their characteristics to change relative to stocks or to cash. If their risk and their relative return remains constant, then the appropriate asset allocation remains constant. Maybe the gurus who expect muted returns from stocks, bonds, and cash over the next twenty years are right. Well, tough times happen. I see no reason to expect stocks to perform relatively better than before. I see no reason to expect that bonds will experience malaise and stocks will escape it.

To me it is illogical to accept more risk when nothing has happened to increase my risk tolerance.

So I will hold portfolio risk where it is and accept lower returns, if I must.

My reason for holding bonds is that I do not have the risk tolerance for 100% stocks. I expect them to have somewhat higher return as well as somewhat higher risk than cash, and I expect the extra risk to be both tolerable and all but invisible when they are part of a portfolio with stocks. Because of low correlation I also expect that the risk of a stock/bond portfolio will be slightly (but only slightly) lower than the weighted average of their individual risk.

In any case, I carry bonds as ballast, not for any low or supposed negative correlation.
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pascalwager
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Re: Why are you holding bonds

Post by pascalwager »

pascalwager wrote: Mon Feb 10, 2020 12:57 pm
azanon wrote: Thu Feb 06, 2020 10:42 am
michaeljc70 wrote: Thu Feb 06, 2020 10:35 am
azanon wrote: Thu Feb 06, 2020 10:28 am
michaeljc70 wrote: Thu Feb 06, 2020 10:21 am
When I shop at the grocery store, and check price/unit of product I'm getting, and buy the one with the best value, no one accuses me of market timing then. I believe that's because I am, in fact, buying the best value by actual definition.

If I'm understanding you correctly, you're suggesting that in the case of stocks, I should pay whatever they're charging for them even though I have price/sales, price/earnings, book value, PE 10, and any number of actual business stats available to me? Is there anything else besides stocks, where I should just pay whatever someone's asking for it, or just stocks?

I'm curious, if you were buying a local business that you liked, would you just pay whatever they were asking, or would you ask to see the books?

I'll have to say, I had no idea I'm market timing when I look at yields on bond funds before I buy them, or earnings on stocks. I thought that was just being responsible. Who knew!
I don't get your analogy. Looking at the books of a business and buying the stock market is not the same thing. There is a huge market for stocks and it is fairly efficient. If I need something from the grocery store I probably need it now and cannot wait 6 or 12 months like you can to buy an investment.

So, what is your strategy when you look at bond yields and earnings of stocks? Is there a formula or rules or just how you feel about it? What if the CAPE is high and bond yields are low? Do you put it in Bitcoin or a MM? Please tell us your strategy rather than analogies.
I'm doing something more along the lines of what 5 Trillion dollar+ Vanguard suggested; I'm currently ~ 50% equities, and about 60% of those are International. I do actually make adjustments sometimes because I think valuations matter and are relevant, just like Vanguard does and just like Jack Bogle did. So, per mathematics, I'm currently ~ 20% US stocks. As I said earlier, sometimes that 30-1 does come in, and a hedged bet is usually a wise bet.
I see that Vanguard is proposing another way to invest using a time-varying allocation based on their annual economic forecast for those willing to take forecast model risk. The current Slowdown portfolio does have a substantial int'l stock tilt but also requires 31% LTT bonds. It's something to consider, but a retiree would need to understand that the model considers inflation to be unlikely during the forecast period.

But the LTT bonds are an important part of the modest overall portfolio returns as the forecast includes low equity returns. The portfolio isn't efficient without the LTT bonds.
Vanguard is working on a research paper to help investors use their forecast models for building time-varying portfolios. This would improve risk-adjusted returns for those willing to accept forecast model risk. If interested, look for The Implications of Time-Varying Return on Portfolio Construction (future).
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Re: Why are you holding bonds

Post by visualguy »

bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
Correct - that's the reason it's called a strategy and not dogma.
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Re: Why are you holding bonds

Post by rockstar »

bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
I like this.

For bonds, here's my strategy: hold short term t-bills and/or CDs to maturity. My objective is to keep up as much as possible with inflation without risking principal or taking on duration risk. My result is that after the Fed lowered rates last year, I'm running a negative real yield. My next step is to look at alternative ways to get back to inflation. My strategy worked before the Fed dropped rates. Now, I need a new strategy.
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Re: Why are you holding bonds

Post by pascalwager »

Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
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Re: Why are you holding bonds

Post by zeal »

I hold bonds because I look at my portfolio at least once a week, sometimes even daily. I'm still young and learning so I like to watch what my money does. What I've watched over the last couple years is that the value of our stock holdings fly wildly up and down while the value of our bond holdings just steadily creep up. That little difference between the two asset classes gives me peace of mind to stay the course with my chosen plan (which actually includes a very heavy stock allocation currently--90/10).
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Re: Why are you holding bonds

Post by pascalwager »

rockstar wrote: Mon Feb 10, 2020 11:55 pm
bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
I like this.

For bonds, here's my strategy: hold short term t-bills and/or CDs to maturity. My objective is to keep up as much as possible with inflation without risking principal or taking on duration risk. My result is that after the Fed lowered rates last year, I'm running a negative real yield. My next step is to look at alternative ways to get back to inflation. My strategy worked before the Fed dropped rates. Now, I need a new strategy.
My bonds were always ultra short-term for decades, but I "avoided" a lot of gains compared to those using intermediate-term funds. Duration risk is actually minimized when it roughly matches your investment horizon. If you're young, then using T-bills and CDs may result in a lot of opportunity cost.
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Re: Why are you holding bonds

Post by rockstar »

pascalwager wrote: Tue Feb 11, 2020 3:37 pm
rockstar wrote: Mon Feb 10, 2020 11:55 pm
bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
I like this.

For bonds, here's my strategy: hold short term t-bills and/or CDs to maturity. My objective is to keep up as much as possible with inflation without risking principal or taking on duration risk. My result is that after the Fed lowered rates last year, I'm running a negative real yield. My next step is to look at alternative ways to get back to inflation. My strategy worked before the Fed dropped rates. Now, I need a new strategy.
My bonds were always ultra short-term for decades, but I "avoided" a lot of gains compared to those using intermediate-term funds. Duration risk is actually minimized when it roughly matches your investment horizon. If you're young, then using T-bills and CDs may result in a lot of opportunity cost.
I agree. But the yield curve is flat, so I’m not seeing a lot of reward for taking more duration risk right now. Maybe when it steepens I’ll go out longer.
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gmaynardkrebs
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Re: Why are you holding bonds

Post by gmaynardkrebs »

rockstar wrote: Tue Feb 11, 2020 3:40 pm
pascalwager wrote: Tue Feb 11, 2020 3:37 pm
rockstar wrote: Mon Feb 10, 2020 11:55 pm
bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
I like this.

For bonds, here's my strategy: hold short term t-bills and/or CDs to maturity. My objective is to keep up as much as possible with inflation without risking principal or taking on duration risk. My result is that after the Fed lowered rates last year, I'm running a negative real yield. My next step is to look at alternative ways to get back to inflation. My strategy worked before the Fed dropped rates. Now, I need a new strategy.
My bonds were always ultra short-term for decades, but I "avoided" a lot of gains compared to those using intermediate-term funds. Duration risk is actually minimized when it roughly matches your investment horizon. If you're young, then using T-bills and CDs may result in a lot of opportunity cost.
I agree. But the yield curve is flat, so I’m not seeing a lot of reward for taking more duration risk right now. Maybe when it steepens I’ll go out longer.
Reward if long rates decline -- JPN 30Y is .34 today, Germany .14. Plenty of room below for US 30Y.
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Re: Why are you holding bonds

Post by Caduceus »

pascalwager wrote: Tue Feb 11, 2020 12:05 am
Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
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gmaynardkrebs
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Re: Why are you holding bonds

Post by gmaynardkrebs »

Caduceus wrote: Tue Feb 11, 2020 4:49 pm
pascalwager wrote: Tue Feb 11, 2020 12:05 am
Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
So prices in one of the largest, most efficient, and most liquid markets are silly?
pascalwager
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Re: Why are you holding bonds

Post by pascalwager »

Caduceus wrote: Tue Feb 11, 2020 4:49 pm
pascalwager wrote: Tue Feb 11, 2020 12:05 am
Caduceus wrote: Sun Feb 09, 2020 6:56 pm I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
I found some information from a 2019 interview and a 2018 letter.

He thinks that bonds can be riskier than stocks for long-term investments. Maybe because of inflation? But then TIPS could be used.

He thinks bonds are fine for retirees and other shorter-term applications.
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Re: Why are you holding bonds

Post by abuss368 »

We hold bonds as part of a targeted asset allocation between Total Stock and Total Bond. Total Bond provides both ballast and dry powder to the portfolio.

During the financial crisis we rebalanced back into stocks with a combination of new money contributed to the accounts and money in Total Bond. In hindsight this worked very well.
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pascalwager
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Re: Why are you holding bonds

Post by pascalwager »

gmaynardkrebs wrote: Tue Feb 11, 2020 4:00 pm
rockstar wrote: Tue Feb 11, 2020 3:40 pm
pascalwager wrote: Tue Feb 11, 2020 3:37 pm
rockstar wrote: Mon Feb 10, 2020 11:55 pm
bampf wrote: Mon Feb 10, 2020 1:07 pm Never said it was. What I said was that ultimately outcomes determine the right strategy or the wrong strategy. A strategy is a policy or plan of action that is designed to achieve an overall goal. If the strategy doesn't meet the objective, how can it be the right strategy?
I like this.

For bonds, here's my strategy: hold short term t-bills and/or CDs to maturity. My objective is to keep up as much as possible with inflation without risking principal or taking on duration risk. My result is that after the Fed lowered rates last year, I'm running a negative real yield. My next step is to look at alternative ways to get back to inflation. My strategy worked before the Fed dropped rates. Now, I need a new strategy.
My bonds were always ultra short-term for decades, but I "avoided" a lot of gains compared to those using intermediate-term funds. Duration risk is actually minimized when it roughly matches your investment horizon. If you're young, then using T-bills and CDs may result in a lot of opportunity cost.
I agree. But the yield curve is flat, so I’m not seeing a lot of reward for taking more duration risk right now. Maybe when it steepens I’ll go out longer.
Reward if long rates decline -- JPN 30Y is .34 today, Germany .14. Plenty of room below for US 30Y.
Yes, my new intermediate funds have gained over 6.59% since last summer.
fourwheelcycle
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Re: Why are you holding bonds

Post by fourwheelcycle »

I take three things on faith - I claim no real sophistication about investing.

1. Over the long term (until now, at least) stocks will do better than bonds.

2. At various points in time, unpredictable to me, the stock market will drop. It could recover in a year or two, will probably recover in four years or so, but may not recover for fifteen years or more.

3. I should hold enough bonds and cash so that I sleep well at night and am not tempted to sell our stocks when they are down.

For me, the magic number for bonds and cash is 20% of our total savings. I retired just before the 2008 drop and we did not sell anything.
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Re: Why are you holding bonds

Post by Pierre Delecto »

I see no benefits to bonds for me. I’m 100 percent stock and have been for years and know I won’t panic when the next major downturn hits. I don’t ever plan on having bonds in my portfolio unless things change drastically in the bond market in the future. I don’t need the drag of bonds on my portfolio.
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Re: Why are you holding bonds

Post by stocknoob4111 »

Pierre Delecto wrote: Tue Feb 11, 2020 10:47 pm I see no benefits to bonds for me.
with bond yields going lower than the dividend yield on the S&P 500 a lot of people are now asking the same question. Sure equities may dip for a few years but it's a strong bet that they will recover within a decade and 90% of the time historically at least they have recovered well before that.

The problem with bonds is that historically the strong performance in recessions has come from capital appreciation due to lowering of rates and high starting yields. Both factors are low possibilities at this stage unless one thinks yields are going to zero.
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TheTimeLord
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Re: Why are you holding bonds

Post by TheTimeLord »

I tried not holding my bonds but they kept blowing away.
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Re: Why are you holding bonds

Post by manuvns »

i am moving my bond portfolio into distressed real estate that pays 12% rental income .
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gmaynardkrebs
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Re: Why are you holding bonds

Post by gmaynardkrebs »

manuvns wrote: Tue Feb 11, 2020 11:47 pm i am moving my bond portfolio into distressed real estate that pays 12% rental income .
Commercial or residential?
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Re: Why are you holding bonds

Post by manuvns »

mostly residential, probably will take out mortgages on them when market goes south . i mostly park money in bonds and wait for right time to buy .
Last edited by manuvns on Wed Feb 12, 2020 12:18 am, edited 1 time in total.
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Re: Why are you holding bonds

Post by Gnirk »

We’ve always held bonds for diversification, though far less than we do now. Currently 75/81 and retired since 2007, we hold bonds to sleep well at night and will continue to do so.
Admiral
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Re: Why are you holding bonds

Post by Admiral »

Would be interesting to hear from retirees (those 65+) who do not hold any bonds.

100/0 seems like a young person's game, or those who are hugely optimistic (and/or well resourced).
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Re: Why are you holding bonds

Post by abuss368 »

Pierre Delecto wrote: Tue Feb 11, 2020 10:47 pm I see no benefits to bonds for me. I’m 100 percent stock and have been for years and know I won’t panic when the next major downturn hits. I don’t ever plan on having bonds in my portfolio unless things change drastically in the bond market in the future. I don’t need the drag of bonds on my portfolio.
There is no issue with this strategy is the investor can tolerate the risk involved and is prepared for the next pullback. Most investors can not accept this level of risk.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why are you holding bonds

Post by abuss368 »

manuvns wrote: Tue Feb 11, 2020 11:47 pm i am moving my bond portfolio into distressed real estate that pays 12% rental income .
Wow! That is a big difference. Have you considered REITs instead?
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why are you holding bonds

Post by abuss368 »

Gnirk wrote: Wed Feb 12, 2020 12:12 am We’ve always held bonds for diversification, though far less than we do now. Currently 75/81 and retired since 2007, we hold bonds to sleep well at night and will continue to do so.
I would agree with this strategy. There reaches a point in life where protecting what we have is more important than to take risk to get more.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why are you holding bonds

Post by Dottie57 »

I prefer an all-weather asset allocation so I have bonds. I maintained a healthy amount of bonds as suggested by advisor of first 401k. Only time I panic sold stocks was in 2009 (10% of my stock at the time). Old enough to see retirement slipping away.

Also am now retired and want the option to sell an asset that has maintained its value instead of stocks may be sale priced
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Re: Why are you holding bonds

Post by Dottie57 »

zeal wrote: Tue Feb 11, 2020 12:42 pm I hold bonds because I look at my portfolio at least once a week, sometimes even daily. I'm still young and learning so I like to watch what my money does. What I've watched over the last couple years is that the value of our stock holdings fly wildly up and down while the value of our bond holdings just steadily creep up. That little difference between the two asset classes gives me peace of mind to stay the course with my chosen plan (which actually includes a very heavy stock allocation currently--90/10).
Well said.
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